IMPACT OF EXCHANGE RATE AND GROSS DOMESTIC PRODUCT ON MARKET CAPITALIZATION IN NIGERIA

Abstract

Market capitalization plays a critical role in shaping financial markets, influencing investor decisions, and determining a company’s presence in the market. Moreover, macroeconomic factors such as inflation, exchange rate instability, and GDP also play a significant role in impacting market capitalization growth. Therefore, this study examines the impact of exchange rate and GDP on market capitalization in Nigeria. Data for this study were acquired from Central Bank of Nigeria (CBN) Statistical Bulletins. All listed firms on the floor of the Nigeria Stock Exchange (NGX) whose statement of financial status made public during the study's time frame of January 1, 2010 to December, 2024, make up the study's population, the sample size of this study was all listed firms with market capitalization that was published under the period of the study. Multiple linear regression was used to test the hypotheses stated with the aid of stata version 18. The results of the regression model reveal that exchange rate has a negative and statistically significant effect on market capitalization. For every 1-unit increase in the exchange rate (USD/NGN), market capitalization decreases by 0.0320 trillion NGN. The coefficient is statistically significant with a p-value of 0.001 (less than the 0.05 significance level), indicating a strong inverse relationship between the exchange rate and market capitalization. It also revealed that GDP has a positive and statistically significant effect on market capitalization, with a coefficient of 0.6229. This means that for every 1% increase in GDP, market capitalization increases by 0.6229 trillion NGN. The p-value (0.004) is well below the 0.05 threshold for statistical significance. The study concludes that the model as a whole is statistically significant and that both exchange rate and GDP significantly influence market capitalization in Nigeria. The study recommends that policymakers should prioritize stabilizing the exchange rate to foster confidence in the Nigerian financial markets. Strategies such as maintaining a stable foreign reserve, curbing speculative currency trading, and reducing dependency on foreign imports can help mitigate the adverse effects of currency volatility. Policymakers should implement strategies to stimulate GDP growth, such as diversifying the economy away from oil dependency, improving infrastructure, and promoting key growth sectors like agriculture, manufacturing, and technology. Pro-growth policies such as tax incentives for businesses, support for small and medium enterprises (SMEs), and the promotion of export-oriented industries can further strengthen GDP growth and, in turn, improve market capitalization.